Short the Costco Dividend For a Real Reward

by Traders Reserve | November 30, 2012 8:00 am

Wholesale retailer Costco Wholesale (NASDAQ:COST[1]) announced a special dividend[2] of $7 per share to be paid on Dec. 18. The whopping payout amounts to $3 billion and is the latest in a string of special dividends [3]being declared in advance of the possible increase on the dividend tax set to take place in 2013.

At the same time Costco made the announcement, it released earnings for the third quarter showing its same-store sales in November gained 6%. Excluding gasoline and currency change, the increase in sales was 5%. Shares of Costco were up on the news Wednesday before settling in on Thursday.

In the context of the one-time special dividend event, let’s take a quick look at a suggested action that could benefit investors even further.

Analysis

Companies are presuming taxes on dividends will be going up in 2013. This may or may not be fact[4], but companies are avoiding the risk of such an increase in preference for “pay me now” instead of later.

What I find interesting in the dividend payout strategy with or without tax increases is that such move is being done in lieu of stock buybacks or reinvestment of capital or future growth. In my opinion these dividends are all part of a larger and broader deflationary trend that is likely to get larger the more and more this happens.

Taking the cash and putting it under the mattress is never a good thing, ultimately. If the market is rewarding a company for doing this, it will likely only be temporary. From a valuation perspective, Costco is expensive. I would use this event to take a short position using December-expiration Puts as my vehicle of choice.

Action

Buy COST December expiration Puts to profit from shares going south after the dividend payout.